By JLP | August 28, 2006
I reviewed Paul Grangaard’s The Grangaard Strategy last week. You can read my review here. In that review I gave a rundown of what the book was about. Today I want to give you an example of what the strategy might look like during retirement. This is only meant to serve as an example.
Here are the assumptions I made:
1. Desired income at retirement is $50,000 in today’s dollars.
2. Retirement is 20 years away.
3. Inflation of 3% both before and during retirement.
4. A yield of 5% on the fixed income portion of the portfolio and an 8% return on the stock portion of the portfolio.
5. 40% of the total portfolio at the beginning of retirement is dedicated to the income ladder.
The results are laid out below (with column explanations below):
The second column is the desired income adjusted for inflation. The third column is the desired income DISCOUNTED at the expected yield on fixed income investments (5.00%). The total in the third column in the shaded area is the total amount of capital needed to fund the first ten years of income ($829,454). The rest of the portfolio ($1,244,182) is invested in a portfolio of stocks growing at 8% per year.
I like the idea of looking at retirement in two parts: income and growth from investments. I also like looking at retirement in 10-year holding periods, as they reduce portfolio risk.
That’s not to say that this strategy is without risks:
1. Inflation could be a lot higher than 3%, which would mean more capital would have to go into the income ladder or a reduction in lifestyle.
2. The yield could be lower than 5%, which also would mean more capital dedicated to the income ladder or a reduction in lifestyle.
3. The return on the investment portfolio could be less than 8%, which would mean a smaller capital base for future income needs.
Despite the risks, we have to keep in mind that there are risks with all strategies. I like this strategy and think it has a lot of merit. I’ll be talking more about it in the future. If you have any questions, comments or you think I missed something, let me know by leaving a comment.